Saudi Arabia industry: Moving up the gears

The Economist Intelligence Unit (UK), 9 November 2006


Country Briefing

Several of Saudi Arabia's hugely ambitious new projects are starting to take shape, heralding the start of a new and bigger phase in the construction boom

Some of the new Saudi projects are variations on familiar themes—for example the expansion of oil production and refining capacity and the deepening of the petrochemicals industry. Others mark fresh departures, notably the development of a minerals processing industry, including a 2,400-km railway, and the construction of economic cities on the Red Sea north and south of Jeddah. One thing these schemes have in common is the speed with which they are advancing, largely thanks to the availability of finance. This is in marked contrast to the desultory rate of progress in the Saudi construction sector in the more stringent times in the decade and a half before the oil price started to surge upwards in 2003.

Mineral future

Saudi contractors have been talking about the potential of the Jalamid phosphate deposits in the north of the country for more than ten years. Some 300m tonnes of phosphate reserves have been identified in the area, close to the border with Jordan, which is sufficient to support the manufacture of phosphatic fertilisers on a major scale, with a view to exporting to Asian markets. The critical problem facing this project is enormous distance of the mines from the kingdom's main heavy industrial zones on the Gulf coast, which have access to the natural gas and electricity supplies needed for such a scheme. However, substantial progress has been made over the past two years, and the first contracts for the railway that will link Jalamid to the Gulf, via the Zabirah bauxite mines were recently awarded to a group of local firms, involving the advanced earthworks package. The Public Investment Fund, an arm of the Ministry of Finance, is now assessing bids from a number of international and local contractors for the actual construction of the main parts of the railway. This work has been split into four packages, of which three have so far gone out to tender. The fourth, involving a link between Zabirah and Riyadh, will be carried out at a later stage.

The mining and industrial elements of the scheme are being overseen by Maaden, a state corporation that is being prepared for privatisation. Maaden is expected to select strategic partners for both the phosphate mining/fertilisers and bauxite mining/aluminium schemes during 2007. The fertiliser plant and the smelter will be located at Ras al-Zour, north of Jubail. Extensive infrastructure construction is required, including a new port and power and water facilities. A huge independent water and power project (IWPP), with capacity of 3,000 mw of electricity and 835,000 cu metres/d of water, is planned for the area.

Besides the minerals railway, transport contractors also have a major opportunity coming up for the Saudi Landbridge, a rail link between Jeddah on the Red Sea and Dammam on the Gulf coast, for which four groups were prequalified earlier this year.

Red Sea cities

There has been a recent addition to the list of new economic cities, with the announcement of an agreement between the Saudi Binladen Group and Malaysian Mining Corporation (MMC) to develop a 100m-sq metre area near Jizan, on the Red Sea coast near the border with Yemen, at a cost of some US$30bn over 30 years. This trend was started at the end of 2005, with the unveiling of the King Abdullah Economic City, to be established north of Jeddah by a consortium led by Dubai-based Emaar Properties. MMC is already involved in Saudi Arabia by virtue of its holding in Malakoff, a member of the Malaysian consortium working on the Shuaiba IWPP. MMC recently received regulatory approval to complete its takeover of Malakoff.

Despite the huge sums involved in the projects being undertaken or planned in Saudi Arabia, financing so far does not seem to be a major constraint, given the abundant public and private liquidity available in the region and in the increasingly important Asian financial markets. However, the appetite of banks and private investors for such projects may yet be affected by capacity concerns. Costs of large-scale industrial and construction projects are escalating in the Gulf owing to the shortage of qualified staff and the rising price of materials. According to GulfTalent.com, a regional recruitment firm, management level salaries in the Gulf have risen by 12.8% over the past year, and several firms have admitted to turning down work owing to the difficulty in finding staff. Prices of building materials have gone up by as much as 50% in some parts of the Gulf.

The big push in Saudi Arabia is aimed to a large extent at generating employment for nationals. However, for this to happen there would need to be a huge improvement in the training and education standards in the kingdom. Saudi-isation has registered some success in certain specialised and elite areas, such as within Saudi Aramco and Saudi Basic Industries Corporation, but has made little headway at middle-management and lower levels.